The Motley Fool Discussion Boards

Previous Page

Investing Books / The Millionaire Mind

URL:  https://boards.fool.com/if-you-take-the-tax-deduction-into-account-for-14451726.aspx

Subject:  Re: Ordinary People...Extraordinary Wealth Date:  3/1/2001  10:12 AM
Author:  waxurt Number:  26 of 220

If you take the tax deduction into account for your mortgage, your real interest rate is less than 7%. Depending on your tax bracket and your state taxes, let's say you are paying about 30% in taxes. If so then that mortgage interest deduction is like a 30% reduction in interest, so your actual interest rate is
7% * 70% = 4.9%

At this rate, it may make more sense to put your extra payments into a money market account than to pay down your mortgage. I still hate debt however, so I will continue to pay down my mortgage ahead of time.


One thing I forgot to take into account in this, is that the interest you gain on your money market will be taxed, so maybe this isn't such a great deal. I would say it makes sense to fund your 401(k) or your traditional IRA and/or your ROTH IRA before you pay down your mortgage. $2000 gaining 5% tax free in a Roth IRA money market is adding to your net worth faster than the real interest rate of 4.9% by paying down the mortgage.

Since you have to pay tax on an after tax investment, it still may make sense to pay off the mortgage unless you can exceed the 7% (or whatever it is) mortgage rate.


Copyright 1996-2022 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us